The Pro’s and Con’s of the Budget 2009
On 22nd April Darling made his Budget announcements to mixed reactions from consumers and industry professionals. Here, we take a look at how the Budget may affect the Contractor community.
The current state of the economy seems to have brought an added interest in the Budget this year, with it being viewed by some as the great rescue plan to get Britain out of the credit crunch and into a more prosperous future. Its impact is yet to be seen in full but already consumer confidence seems to be rising and residential property sales are reportedly at their highest in eighteen months.
With a variety of changes aimed at breathing new life into the housing market and the economy in general, the Budget is an ambitious plan for renewal. However, some proposals have been greeted with a better response than others. In this article, Planet Contractor looks at the key points from this years Budget and how they may affect our Contractor clients.
The housing market – a breath of fresh air?
Having been viewed as the cause of the economic downturn, the shake out in the housing market was certainly a priority for the Budget this year. Darling’s response to the current slump has been fairly positive, with a stamp duty holiday on transactions up to £175,000 being extended until the end of the year and a six month extension to the Support for Mortgage Interest Scheme. This is the initiative that covers mortgage payments for people that have lost their jobs and helps them to keep repossession at bay until they are back on their feet.
In perhaps the most positive step in the right direction so far, the major UK banks are set to increase mortgage availability by approximately £20bn in a bid to encourage first time buyers and existing homeowners to move up the ladder. In addition to this there will be £80 million invested into HomeBuy Direct, the shared equity scheme that enables first time buyers without a large deposit to buy a house.
This should hopefully free up lending in the market which will in turn encourage confidence in both buyers and sellers. For Contractors that are struggling to find a mortgage on the high street, our contract based underwriting could be the answer you are looking for. We still have our Contractor exclusive underwriting with a number of key providers and with Bank of England base rates at their lowest in over 300 years, there are plenty of low cost deals to be had.
Tax relief clampdown – Contractors beware!
Despite the positive announcements for the housing market, there were some catastrophic developments for tax relief. Once the haven for Contractors looking for tax relief, pensions have been turned upside down for higher earners by Darling’s new Budget.
There will be a restriction on the tax relief you can gain from pensions if you earn in excess of £150,000. This comes hand in hand with the announcement that income tax will rise to 50% for those earning over this threshold each year, starting from April 2010 (read more about the pension reform in our article ‘how does the pension cap affect Contractors?’ which can be found in this the newsletter).
On top of the new 50% rate comes news that from next April personal allowances will be withdrawn for those earning over £100k by one pound for every two pounds earned. This means that for someone on, say £105k the effective top rate of income tax is a whopping 60%.
The only ‘saving’ grace is that the ISA limit has been increased to £10,200 for anyone over the age of 50 from this year and for everyone else next year. Of this £10,200 up to £5,100 can be invested in a cash ISA. However, investing in a stocks and shares ISA may offer higher returns alongside its higher risk especially as interest rates are historically low at the moment and this is affecting the rate of return on cash investments.
Head Offshore?
Whilst you leaving the country may be a little drastic, your money could. It’s possible that higher earning Contractors could exploit the tax deferral offered by offshore bonds.
Typically based in the Isle of Mann or Channel Islands, these investment wrappers benefit from ‘gross roll up’ of gains and interest (there is little or no tax deducted whilst growth accumulates). You may also be able to en-cash at a time when your tax rate is lower than at present i.e. during retirement or if you choose to live/work abroad at any time.
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